Chapter 8-Foreign Direct Investment

Limitations of LIcensing

A branch of economic theory know as internalization theory seeks to explain why firms often prefer foreign direct investment over licensing as a strategy for entering foreign markets this is also known as the Market Imperfection Approach

Oligopoly

An industry composed of a limited number of large firms.

Multipoint Competition

Arises when two of more enterprises encounter each other in different regional markets, national markets, or industries.

Licensing 3 Major Drawbacks

1.Licensing may result in a firms giving away valuable technological know-how to a potential foreign competitor. 2. Licensing does not give a firm the tight control over manufacturing, marketing, and strategy in a foreign country that may be required to maximize its profitability

The Form of FDI: Acquisition Versus Green Field Investment

FDI can take the form of a greenfield investment in a new facility or an acquisition of or an merger with an existing local firm. UN estimates indicate that some 40 to 80 percent of all FSI inflows were inthe form of mergers and acquisitions between 1998 and 2012. However, FDI flows into developed nations differ markedly from those into developing nations. In the case of developing nations, only about one third or less of FDI is in the form of cross border mergers and acquisitions. The lower percentage of mergers and acquisitions may simply reflect the fact that there are fewer target firms to acquire in developing countries.

Outflows of FDI

Flow of foreign direct investment out of a country.

The direction of the FDI

Historically most FDI has been directed at the developed nations of the world as firms based in advanced countries invested in the others' markets. During the 1980s and the 1990s, the Unites States was often the favorite target for FDI inflows. The United States has been an attractive target for FDI because of its large and wealthy domestic markets, its dynamic and stable economy, a favorable political environment and the openness of the country to FDI. Investors include firms based in Great Britain, Japan, Germany, Holland and France. Inward investments into the United States remained high during the 2000s and stood at $167billion in 2012. The United Kingdom and France have historically been the largest recipients of inward FDI.

Exporting

Involves producing good at home and then shipping them to the receiving country for sale. Sales of products produced in one country to residents of another country.

The Source of FDI

Since World War II, the Unites States has consistently been the largest source country for FDI. Other important source countries include the United Kingdom, France, Germany, the Netherlands, an Japan. Collectively this six countries ccounted for 60 % of all FDI outflows for 1998-2012.

Stock of FDI

The total accumulated value of foreign owned assets at a given time.

Limitation of Exporting

The viability of an exporting strategy is often constrained by transportation costs and trade barriers. When transportation costs are added to production costs, its becomes unprofitable to ship some products over a large distance.

Internalization Theory

Marketing imperfection approach to foreign direct investment

Foreign Direct Investment in the World Economy

The Flow of FDI, Stock of FDI, Outflows of FDI, Inflows of FDI

The Flow of FDI

The amount of foreign direct investment undertaken over a given time period( normally one year)

Greenfield Investment

The establishment of a new operation in a foreign country. The second involves acquiring or merging with an existing firm in the foreign country.

Inflows of FDI

Flow of foreign direct investment into a country.

Introduction

Foreign direct investment( FDI) occurs when a firm invests directly in facilities to produce or market a product in a foreign country. According to the U.S. Department of Commerce, FDI occurs whenever a U.S. citizen, organization, or affiliated group takes and interest of 10% or more in foreign business entity.